Tax Rulings and NHR – What we have learned?

Tax rulings are an additional mechanism to provide certainty for a taxpayer moving to Portugal as in some circumstances they may serve as an adequate tool to obtain a formal position regarding the tax treatment/qualification of a particular item of income.

We selected 10 tax rulings issued in Portugal in the last years that provide some insights on the inner working of the NHR regime and help understand also when the ruling request may prove useful.

Before embarking on the journey of tax rulings it is better provide a glimpse of the ruling regime in Portugal.

• A written ruling request can be either made under an urgent procedure or non-urgent or regular procedure.

• The main differences between the two procedures are: (i) regular procedure does not require the payment of any up-front fee (set at a fee of €2,500 and €25,500 based on complexity for urgent requests); (ii) the regular ruling requests must be indicatively processed within 150 days from submission, whilst the urgent requests are subject to a 75 days’ hard timeline with a tacit approval mechanism if there is no decision within such timeline (rarely happening).

• Tax rulings once granted are binding both on the tax authorities and the taxpayer, but the taxpayer retains the ability to challenge a non-favourable ruling in court.

• Tax rulings are generally published on the website and the identity of the taxpayer is not disclosed.

• Tax rulings may cease to be valid: (i) if factual/legal background changes; (ii) after four years of the issuance; (iii) after 1 year if the tax authorities expressly revoke the ruling.

• Non-residents with a TIN may request a ruling.

We divided the 10 rulings in 5 separate buckets of cases. The first addresses some formal requirements of the NHR regime. The second deals with the high value-added test for employment income. The third and the fourth focus on foreign based real estate and investment income. The fifth deals with foreign sourced pension income.

NHR regime

1.  Ruling 3297/2017 - 10 year rule and interruption of NHR status – The period of application of the NHR is continuous and is not suspended, meaning that an individual that moves abroad within that terms may return under the NHR regime to the extent he is still within the 10 year rule.

2.  Ruling 389/2018 - Proof of UK tax residence to apply for the NHR regime – To prove tax residence abroad in the prior 5 years before the application, a “Confirmation Letter” of UK tax residence listing the years spent in the UK suffices. The tax authorities retain the ability to request additional elements attesting residence abroad.

Value added activities and employment income

3.  Ruling 666/2018 - NHR with high value-added activities (HVA test) but accumulation of functions as director/top management and board member – The 90% remuneration allocated to activity of Director (802 Code for HVA) will be taxed at flat rate 20%. The understanding for the 10% remuneration allocated to the role of board member (801 Code for HVA) is that the 20% flat rate may only apply if the company paying the income is framed for tax benefits under the Tax Code of Investment (which was not the case) and hence progressive rates apply to that portion of the employment income.

4.  Ruling 4368/2019 - Taxation of income earned by an NHR for the provision of work on board a ship of a UK based company - The application of exemption method on foreign employment income under Article 15 of the DTT between UK/Portugal depends on the taxpayer proving that the income was effectively taxed in the UK (source country).

Foreign real estate income and gains

5.  Ruling 4217/17 - Taxation of UK sourced real estate income and gains earned by an NHR – Since both Article 6 and 13 of the Double Tax Treaty between UK/Portugal attributes shared taxing rights on income from real estate, either derived from rental or from disposals, hence the exemption method in Portugal applies.

6.  Ruling 141/2018 - Australian source gains from the sale of real estate derived by an NHR  - Despite no tax treaty being in place with Australia, the OECD Model Convention provides shared taxing rights on the disposal of real estate and since Australia is not a blacklisted jurisdiction the income will be exempt under the NHR regime.

Foreign investment income

7.  Ruling 5298/2019 - Income distributed by a Real Estate SICAV resident in the Switzerland to shareholders resident in Portugal and qualifying as NHR - SICAV distributions qualify as dividends and fall within Article 10 of DTT between Switzerland/Portugal, hence the income will be exempt under the NHR regime.

8.  Ruling 5583/2019 - Imputation tax credit derived by a NHR in Portugal that is shareholder of a Maltese based company – Imputation credit is qualified as investment income (category E) with the nature of dividends under the DTT between Malta/Portugal and since the income may be taxed in the source state (Malta) the exemption method in Portugal applies.

Foreign Pension income

9.  Ruling 2540/2017 - Pension income paid by NATO to an NHR (regime until 2020) –  Pension income sourced in Belgium and paid to an NHR is considered to have been obtained outside Portugal (not territorially linked) and hence the exemption method applies Note: as from 2020 for new residents a flat 10% tax applies.

10. Ruling 4220/2017 - Pension income sourced in Isle of Man and Guernsey by an NHR (regime until 2020) - Pension income sourced in Isle of Man and Guernsey and paid to an NHR are considered to have been obtained/sourced outside Portugal and hence the exemption method applies. No impact from Isle of Man and Guernsey being blacklisted. Note: as from 2020 for new residents a flat 10% tax applies).

Key takeaways

The 5 key conclusions from this briefing are the following:

1.  The ruling practice is well developed in Portugal;

2.  Timeframe of rulings are acceptable especially under the urgent procedure;

3.  Foreign income qualification under the NHR are the core issues addressed;

4.  Portugal follows the OECD Model and Commentaries for treaty interpretation issues; and

5.  Potential discrimination based on EU primary law are not addressed via rulings.

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© Kore Partners, 2021

This briefing provides for general information and is not intended to be an exhaustive statement of the law. Although we have taken care over the information, this should not replace legal advice tailored to your specific circumstances. This briefing is intended for the use of Kore Partners clients and is also made available to other selected recipients. Queries or comments regarding this including joining our mailing list can be directed to kore@korepartners.com